We are at the beginning of what is likely to be the biggest transfer of wealth in human history. As the baby boom generation ages many of them will be passing on to their children and they will be looking to their accountants to provide them with advice on how to make this happen smoothly.
Roughly 20% of businesses are family owned but only a third of those survive intergenerational transfer. Some of this is due to poor succession planning. The reason that so many businesses fail to put together a succession plan is that the process can be highly complex. Family business succession planning must take account of countless unknown future circumstances, like the economy, the regulatory environment, and the state of the market in which the business operates, and family factors, like family dynamics and the changing skills, maturity, career objectives, economic needs, and health status of individual family members.
It is an area where the answers will not be black and white and where you will often need to find creative solutions and be prepared for the emotions of the participants. Under these circumstances of pervasive uncertainty and complexity, it is understandably why so many family business owners avoid constructing a proper business succession plan. But the consequences of failing can be so catastrophic for not just the business but on familial relationships it is extremely import that this tackled with a coherent plan rather than just winging it and hoping for the best.
As you work with your client in preparing a succession plan you should make sure it covers the following areas for their accounting requirements:
Collecting Legal Documents: This can uncover any underlying legal issues that may affect the process of transferring the ownership of the business.
Valuing The Business: You will need an up to date and realistic valuation of the business before you start working on ways of dividing it up among the heirs.
Restructuring: After you have uncovered the legal issues and have a valuation in hand it is time to look at the ways the business needs to be restructured in terms of debts and equity to support passing on a viable business.
Buy-Sell Structure: This is where you help the clients design the rules that will regulate governance, ownership, and owner exits paying particular attention to unit voting, the governing board, executive authority and beneficial ownership.
Key Contracts: You will want to review some of the businesses keep contracts with suppliers and customers to make sure there are no surprises when ownership changes hands.
Preparing for Transfer: Here you will want to update the owners estate and retirement plan as well as deal with the issues such as compensation for the owners heirs that will not be participating in the family business going forward. This could in some cases be accomplished with something as simple as small business loans or as complex as multiple shares and bond classes, and complex trusts. The individual circumstances will be your guide to the best solution.
Director of Accounting for Private Educational Institutions at Jefferson+Partners (Sydney) from 2007-2015. Founded and led Lebrau & Partners Pty. Ltd. from 2015 until now - a boutique accounting firm serving educational institutions across the Asia Pacific (both public and private, primary, secondary and tertiary institutions).
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